This Strategic Insights discusses how to bolster tax revenue by increasing potential growth, job opportunity, and productivity. This may be achieved by lowering tax rates, reforming regulation, simplifying the tax code, and incentivizing investment to enhance global competitiveness. Various guiding principles outlined herein suggest how to tackle the broader issue of fiscal reform, including spending and tax reform.

Today’s fiscal deficit remains high and unsustainable by global historical standards with rapidly expanding entitlement programs in excess of inflation. U.S. Debt/GDP exceeds 80% with a current 3% fiscal deficit---spending exceeds tax revenue by 3% of GDP. Treasury debt has doubled to $20 trillion since 2009. Only by extinguishing the fiscal deficit can we begin to bend the curve below.

Source: Congressional Budget Office (CBO)

Tax reform is one side of needed fiscal reform—spending also must be addressed to turn a high fiscal deficit into surplus during periods of economic growth. Raising tax rates historically slowed real growth in GDP and tax revenue as inflation increased. Growth has disappointed since 2009 due to higher tax rates1, spending, fiscal stimulus, and new regulations2, which limited growth and therefore tax revenue. Debt/GDP should be falling now, if not for misguided fiscal and regulatory policies. Pro-growth tax and regulatory reform can do the heavy lifting of fiscal reform with additional discipline of spending reform.

Drivers of spending growth are obvious in the chart below, including Social Security, retirement liabilities, health care, and interest. Mandatory outlays plus interest totalling $2.8 trillion in 2017 are 70% of the budget. Staring at this chart, we realize growth in mandatory spending programs must slow. Spending reform is politically difficult, but must be coupled with tax reform to extinguish our unsustainable fiscal deficit.

Strategic Insights This publication is for general information only and is not intended to provide specific advice to any individual. Some information provided herein was obtained from third party sources deemed to be reliable. We make no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication, and bear no liability for any loss arising from its use. All forward looking information and forecasts contained in this publication, unless otherwise noted, are the opinion of this author, and future market movements may differ from expectations. Index performance or any index related data is provided for illustrative purposes only and is not indicative of the performance of any portfolio. Any performance shown herein is no guarantee of future results. Investment returns will fluctuate, and the value of holdings may be worth more or less than original cost. © Strategic Frontier Management (www.StrategicCAPM.com). 2017. All rights reserved.

1 Dividend and capital gains, plus individual income tax rates increased, as well as Obamacare taxes added

2 Dodd-Frank financial reform, Basel II/III, MiFID II, and Affordable Care Act, plus agency rule making (EPA, Transportation, Energy)

3 Payroll taxes are split between you and your employer, so employees only observe half this amount, yet combined is a cost of being employed. After accumulating over a lifetime, why should Social Security ever be subject to means testing?

4 “The Economic Burden Caused by Tax Code Complexity”, by Arthur Laffer et al, estimated that administrative, filing, and compliance costs have increased since 1986 tax reform, exceeding $431 billion in 2010 or 30% of income tax revenues.

5 Rothification may provide near-term tax revenue by taxing contributions, but foregoes greater deferred tax revenues in the long run when IRAs are cashed out and income taxes are paid on both contributions and investment earnings.

6 Federal corporate tax rate of 35%, plus 4.2% state average. Japan recently cut its corporate tax rate from 39.5% to 38%.

© Strategic Frontier Management